Houses - cheap as chips?

As the year comes to an end many landlords will be drawing up their plans for 2012.

With the buy-to-let mortgage market improving many of us are thinking of adding to our buy-to-let portfolio.  But should we…are houses cheap or are we buying an asset that’s value is just about to plunge?

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The classic boom

Any landlord who has brought property over the last couple of decades will be aware that we were in a classic asset price bubble.  Have a look at this graph.

Cast your minds back to the late nineties and earlynoughties for the 'Mania Phase'.
House prices have stabalised since the credit crunch and we have so far avoided a collapse. 

However, the only reason for this is the use of a historically loose monetary policy by the Bank of England (BOE).  In other words interest rates have been on the floor since 2008, at all time historic lows. The latest predictions from economists and the money markets is that rates will not rise until the end of 2015, yes 2015.  That’s almost another 4 years at these crazy low rates!

If somebody had told you back in 2007 that the BOE would keep rates at 0.5% from 2008 to 2015 you would of thought them crazy. We live in mad mad times! 

Extraordinary times

There is no question that without the massive monetary stimulus by the BOE reducing interest rates to effectively zero and the use of quantative easing; we would have been well into an almighty house price crash!  

A deluge of repossessions would have resulted in house prices dropping 40-50%  from their peak.  This would have represented a financial Armageddon for many of the banks and building societies holding the mortgages, which is exactly why the government has stepped in.  The result of all this is that this short and painful correction has been extended to a much longer managed fall.  The fall may not be a dramatic drop in values, however in real terms house prices adjusted for inflation in most parts of the country (apart from London) have been steadily declining.

This means for many landlords their wealth is reducing. A chilling thought.

Skating on thin ice!

The fact that house prices are being propped up like this represents a real risk to landlords.  The other aspect of an investment that many landlords don’t always appreciate is that by having their wealth tied up with a single asset class, they are uniquely exposed to fluctuations in this market.  The classic investment advice is NOT to put all your eggs in one basket.  This is something that landlords often ignore preferring to drop there whole investment exposure onto  residential property.

Safe as houses in 2012

The latest house price predictions from the Halifax indicate a year of relative stability.

The reality is, most people still view housing as a safe haven despite the underlying risks.  Uncertainty and the lack of a safe alternative investments make the perceived low risk nature of housing attractive still as an investment.  The ultimate quality of housing is it’s intrinsic value (unlike gold).  Paradoxically, the crash was caused by imprudent lending and an unsustainable housing boom.  Despite this, because of the uncertainty caused by the resulting crash the British “love affair” with putting their cash into property seems unabated despite many house price metrics still pointing to the fact that house prices are unsustainable at the current levels. 

The facts are that the structural shortage of housing in the UK should continue to underpin prices to a certain degree. Assuming that the government manages the slow rebalancing of the house price equation there shouldn’t be a steep fall in UK residential property values. 

There is however, one fly in the ointment.  A big blue bottle called Europe. 
A break up in the Euro could just cause the collapse in the banks balance sheets that will result in them having to restrict lending even further.  This could be the trigger for a real house price collapse causing us landlords all to fall through the ice and into the cold icy water below. 
Then we will have to wake up to the reality that house prices remain overvalued and some of us may find that we perish in the icy depths.

Got a view?  Send us your comments.

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You make some valid points
 You have to rember buying investment property is a long term game
 I never sell property once its bought as long as it Rents I will sit on property
 I never see property as a risk the bigger you get the safer it becomes Just look at the property Kings and Queens such as the Queen and Duke Of westminster if its good enogh for them its good enough for me
There wealth has come from land and property the biggest risk to me is TAX when I die
 I've bought right through this crunch and I will do so for as long as I live hopefully a long time to come
Hopefully my family will prosper on my efforts that's all i do it for now
Land and Property are power we are an island our population is growing in the long term property has to rise as Rents do too
Im sticking to what I know best
Dislexic Landlord

Dislexic landlord its good to hear from you after such a while.
I couldn't agree with your comments as wholeheartedly any more than I do.
Everything you say is right especially;-
1) If the monthly return works then who gives a s**t about the asset value if you not forced into sale?
2) Its a long term game. I know we both been at the game for 20 years or so. We have seen the rises and falls before and no doubt we will see them again before we leave this world. Again see point 1!
3) Housebuilding being less than half of its required amount will see the supply/ demand maintain the asset value- again if this matters?
Good to hear from you. Paul

I notice that you mentioned a price fall of 40 to 50 percent in value . One may laugh at the thought , but in fact where I live in N. Ireland house prices generally have fallen at least 40 percent in value since the boom . If selling a house this 40 percent average is ignored ,  one is lucky to sell only when dropped by percent . I hear the national average reduction  in England is 18 percent . You guys simply don't appreciate how fortunate you are over there . A drop of this much is only idealistic over here . Michael